QBI and 1099Misc

[TAXMAN]

Basic facts. TP has business in State A. Finds sales reps in States b and c who work from home and never travel anywhere. They receive phone calls and internet contacts. Place orders to manufacturers. Manufacturers produce item and sends to customer in state D.  Customer sends payment to TP in state A. TP in State A Pays reps STATED same amount every week.(unless reps take a day off) Issues form 1099misc to reps in states b and c. Would this in your opinion justify a QBI deduction for the reps in states b&c?

[Lee B]

Sounds like they are employees on monthly salary.

[Yardley CPA]

I agree with cbslee, this sounds more like an employer/employee relationship.  Assuming that's the case, wouldn't you need to deduct "wages" prior to taking the QBI?

[Gail in Virginia]

Do the "sales reps" work for other companies as well doing similar work?  Then I would agree that they are in business.  If they have an exclusive contract with the company in state A, they sound an awful lot like employees and should be getting a W2.  What kind of expenses do they have in performing this work?  IF they are accepting the 1099 MISC and filing a schedule C, I don't see why they would not qualify for QBI but I am not sure what the result would be if they were audited and IRS decided to reclassify them as employees. 

[TAXMAN]

I have argued point that TP in state A should be an employer. Reps work for TP only. Reps have been filing Schedule C for last 4 years that I can tell. It seems like they are willing to go this route. IRS may look at it differently if audited.

[Roberts]

If you are going to claim the 1099-misc is the reality, I think the QBI is justified.

 

The 1099-misc could be completely justified, we don't have enough information. Years ago my wife looked into doing something relatively similar - it was 1099-misc and it was a major employer. I think one of their justifications was that they expected you to work 8 hours within a 13 hour period. From like 6am to 9pm at night you had to do 8 hours and they didn't care where you were - you just had to work within that local time frame.

 

Does the Intuit Proconnect service they keep advertising to me (where they hire CPAs and EAs to answer questions) pay via W2 or 1099?

 

[Medlin Software, Dennis]

2 hours ago, Roberts said:

you

That is the magic word, to me.  If the entity being paid could not have others work, (and also whenever they elected, not for a specific amount of time within a window, and did not have other clients, business license, business insurance, etc.) then employee is proper.

In the OP, the deduction for a day off is employee all the way.

Probably not a huge chance of getting caught, but I personally would not be comfortable with a 1099 in the OP.

[BulldogTom]

In CA under AB5, they are employees.

Tom
Modesto, CA

[Matthew in the PNW]

I would say employee is the safe route to go, but you might look at these avenues before defaulting to the easy route.

 

Does the employer have control of when that day off is taken, or how many are taken? Is PTO offered? Is there a minimum hours worked expectation?

How is the pay structured? Is it billed for hours worked as a service, or as fees earned for sales.... or is just for hours "on the clock"? 

[Medlin Software, Dennis]

My fav is if the person being paid can sub the job out to others, or have someone else do the work, and no time accountability.  If not, then employee.  If someone really is running a business (not an employee), they likely have setup some sort of entity to help shield their personal assets from any business issues.

Extra complication with being in separate states, if employee, as the employer has exponentially complicated their HR and payroll compliance issues (which I have posted about before).

[Gail in Virginia]

I think that we all agree this is most likely an employee/employer situation, but that was not the question in the OP.  At least, not as I read it.  I think the question is whether or not these reps can take the QBI deduction since they are being giving a 1099 and treated as self employed.  And while I would hesitate to prepare the return for the "employer" in this instance because I don't think he/she is obeying the law regarding employment taxes, etc., I would prepare a return for the people getting the 1099's and I would most likely take the QBI unless there is some other factor that would preclude it (income too high, SSTB, something else) because those employees do not really get to choose their status. 

[Matthew in the PNW]

6 minutes ago, Gail in Virginia said:

I think that we all agree this is most likely an employee/employer situation, but that was not the question in the OP.  At least, not as I read it.  I think the question is whether or not these reps can take the QBI deduction since they are being giving a 1099 and treated as self employed.  And while I would hesitate to prepare the return for the "employer" in this instance because I don't think he/she is obeying the law regarding employment taxes, etc., I would prepare a return for the people getting the 1099's and I would most likely take the QBI unless there is some other factor that would preclude it (income too high, SSTB, something else) because those employees do not really get to choose their status. 

If a 1099 is issued incorrectly isn't the responsibility on the recipient to reach out to the issuer to fix it?

 

[Medlin Software, Dennis]

52 minutes ago, Matthew WaitingOnWA2BaCPA said:

If a 1099 is issued incorrectly isn't the responsibility on the recipient to reach out to the issuer to fix it?

 

While I do not prepare for money, I would prep for the recipient only if I could believe they are running a business.  A business license or other business document would do the trick.  When I was younger, I would likely have looked the other way.

I have a similar battle every year about now.  S Corp's wanting to fudge a W2 and W3 to reflect the >2% shareholder/employee insurance.  While it is true, the W2 and W3 need to reflect the amount to maintain tax benefits, the amount is also wages, taxable on constructive receipt, and should be proportioned to every paycheck.  Most face the issue only at tax time, when their preparer tells them their W2 is not correct, and then fail to believe it when they are told it is also taxable wages.  The "extra" complication is the person who is usually handling the payroll is also the shareholder/employee, and has a tough time separating the issue to the employer and employee perspectives.

[Matthew in the PNW]

20 minutes ago, Medlin Software said:

While I do not prepare for money, I would prep for the recipient only if I could believe they are running a business.  A business license or other business document would do the trick.  When I was younger, I would likely have looked the other way.

I have a similar battle every year about now.  S Corp's wanting to fudge a W2 and W3 to reflect the >2% shareholder/employee insurance.  While it is true, the W2 and W3 need to reflect the amount to maintain tax benefits, the amount is also wages, taxable on constructive receipt, and should be proportioned to every paycheck.  Most face the issue only at tax time, when their preparer tells them their W2 is not correct, and then fail to believe it when they are told it is also taxable wages.  The "extra" complication is the person who is usually handling the payroll is also the shareholder/employee, and has a tough time separating the issue to the employer and employee perspectives.

This is a separate issue, but the health insurance can be paid of out pocket by the shareholder and reimbursed by the company. At least that how it was the last time I read up on it.